question archive Consumption and the multiplier
Consumption and the multiplier
Subject:EconomicsPrice: Bought3
Consumption and the multiplier. Suppose that aggregate consumption responds to temporary changes in income. Consider the following modified version of the consumption equation: Ct Y a +37, where ï is between 0 and 1. Compared to the case seen in class, this consumption equation now includes an additional term that is proportional to short-run output. (a) Explain the intuition behind equation (b) Derive the IS curve under the consumption equation in (c) Consider a negative demand shock, that is, a decrease in ? by a given amount. Holding the real interest rate constant, does the IS curve derived in item (b) predict a larger or a smaller reduction in short run output, compared to the standard IS curve seen in class? (d) Consider an increase in the interest rate. Does the IS curve derived in item (b) predict a larger or a smaller reduction in short run output, compared to the standard IS curve seen in class?
